Last year was a solid one for the U.S. economy and the logistics industry that underpins it, according to the annual State of Logistics report.
However, what’s notable in this year’s report was the emphasis on 2020 — the onset of the COVID-19 pandemic and its disruptive effects on the economy and the supply chain.
The annual report, issued in June, is produced by Kearney, a U.S. management consulting firm with global operations, in partnership with the Council of Supply Chain Management Professionals and Penske Logistics. Kearney collaborated with Truckstop.com, Freightwaves, and many other contributors.
The annual State of Logistics report normally compiles information about the industry for the previous calendar year and early trends detected in the year the report is issued. “This year we changed a little bit because of the pandemic,” noted Korhan Acar, a principal at Kearney, and focused considerable attention on events of early 2020.
Roller Coaster Effect of COVID-19
“When COVID-19 started impacting the United States in March, it completely disrupted the transportation industry,” Korhan said in an interview with Pallet Enterprise, especially after state governments began restricting businesses and activities. Transportation activity actually increased before the pandemic, but it declined sharply after shutdowns began. As the restrictions have been eased or lifted here and there and the economy began reopening, transportation activity began to pick back up.
Some industries served by the pallet industry have been severely impacted — negatively — by the pandemic, he noted, and will continue to suffer its effects. The chemical industry and some older industry have been adversely impacted. By contrast, some sectors of the economy have done well and even thrived, such as the grocery industry and the retail industry. “Obviously,” said Korhan, “e-commerce is a big part of the whole retail situation.” As the report noted, e-commerce has continued to enjoy booming growth, and it has been amplified during the pandemic by people who are sheltering at home and shopping online.
Diversifying customer mix was a key recommendation in the report for motor carriers. “You can diversify your customer mix to rely more on fluid, rapid-response e-commerce flows and less on traditional, scheduled, retail and industrial flows.”
Korhan recommended that pallet companies diversify their business if their accounts are mainly tilted toward older industries. “A long-term diversification plan would be critical,” he said. Fifty percent of customer accounts should be in industries that are less impacted by the pandemic, he suggested.
“What kind of clientele do you have?” asked Korhan. “If you’re serving primarily industries that benefited from COVID-19, then, yes, you’ll see a continued, sustained increase.” However, if you have a lot of customer accounts in the chemical industry or other heavy industrial businesses, there is going to be a “reactivation period” for those industries, he explained. Although some industries, like the airlines and hospitality businesses, will not fully recover for 8-10 months or even longer, other sectors will recover “very soon,” he said, as long as the economy continues to reopen.
Korhan also echoed another recommendation of the report for carriers: improve asset utilization. “You should analyze your customers to understand which are the most profitable and cohesive with your network—prioritize these lanes,” the report reads. “An alternative approach is to take advantage of freight marketplace apps such as JB Hunt’s Carrier 360, CoyoteGO, and Uber Freight to monetize your empty miles, without worrying so much about the yield.”
For pallet companies that have their own trucking operations, “better asset utilization should also be on top of their book,” suggested Korhan. Increase backhauls to improve the utilization of the assets. “Get help from a technology solution or a strong plan to achieve better asset utilization,” he said.
Companies can create backhauls by looking for opportunities in the spot market as well as developing customers and building contracts with them. “Try both ways,” recommended Korhan. This is another area where it pays to diversify.
Demand in the spot market for trucking will be “quite strong” for the next 8-10 months, he predicted, because of a decline in capacity. He believes that trend will hold as the economy continues to reopen and restrictions are not re-imposed.
Some of the most popular ‘load boards’ to find back-hauls on the spot market are www.truckstop.com and www.dat.com. Uber Freight is a growing web-based platform to look for loads — www.uber.com/freight. “You become part of their network,” said Korhan.
Overall Logistics & Transportation Trends
The U.S. economy completed a solid year with 2.3% growth in 2019, taking Gross Domestic Product to $21.43 trillion. The logistics industry economy grew as well, to $1.63 trillion in expenditures — 7.6% of GDP, down from 7.9% the previous year. However, the report noted, 2018’s fast GDP growth and capacity shortages had driven logistics costs to the highest percentage of GDP since 2008. “So, 2019 felt like a return to normal.”
Business logistics costs rose 0.6% in 2019, far less than the 2019 inflation rate of 2.3%. Transportation costs grew by 2.5% while inventory carrying costs fell by 4.6%, the latter reduction resulting from a decline in the cost of capital.
Motor carriers grew 3%, driven primarily by growth in private and dedicated fleets.
Road freight capacity improved, benefiting shippers. Road freight, the biggest segment of U.S. logistics spending, already was slowing in 2019 after a booming 2018. After two years of scarce capacity and rising rates, the market tipped back in favor of shippers in 2019. Shippers regained buying power, negotiated lower rates and secured capacity.
Carriers experienced reduced profits and ordered fewer new Class 8 trucks. Large carriers are looking to technology investments to improve efficiency. Smaller carriers, especially those in industries highly impacted by the pandemic, must look to app-based solutions and brokers to provide access to better fit routes and backhauls.
In 2020, the disruption of consumer supply chains caused by the pandemic is expected to drive a new surge in warehousing demand, especially for temperature-controlled warehouse space, as more consumers order food online.
Pandemic e-commerce also is leading to an expected increase in adoption of warehouse automation to keep costs and operational complexity in check even further; for example, sales of autonomous mobile robots are estimated to double to $27 billion by 2025, according to LogisticsIQ.
Moving Away from a Lean Supply Chain
Overall, it is estimated that a 5% bump in safety-stock inventory will require about 750 million square feet of industrial space as companies soften their lean inventory strategies. The rise in stock levels should spur industrial activity, given the expectation that the warehouse construction pipeline will remain full and warehouse availability will remain tight.
“In our view,” the report concludes, “the experience will lead to a new emphasis on supply chain resilience, which is to say that logistics will build in more options and suppleness. The pendulum that once swung toward ultra-efficient, single-source, just-in-time, and heavily cost-focused supply chains will swing back in favor of flexibility and reserve capacity to cope with uncertainty and risk.”
The pandemic, and global measures taken to reduce its further spread, have disrupted supply chains, scrambled logistics capabilities, and eliminated huge swaths of demand. The size, shape, and timing of a recovery remain in question.
Government leaders have hinted that even if there is a resurgence in the coronavirus, they may not impose the earlier restrictions, Korhan noted. “Even if there is a second wave, government may not shut down,” he said. “We still expect the recovery to be 70-80% by the end of this year.” Some sectors of the economy will enjoy a 100% recovery, he added.
